Market update: The Fed sounds dovish but Trump and Italy spoil the party

24 May

by Mihály Tatár

 

Good Morning!

 

  • Wednesday’s news bombardment was quite a mixed bag and the market was clearly unsure how to exactly respond: The Fed Minutes showed a more-dovish-than-expected central bank, causing bond yields to slide (USD 10Y yield 2.98%), but this had limited effect on the Dollar with the Italian President asking Giuseppe Conte, the nominee of Five Star and the League, to form a government, and European PMIs cooling further with US figures advancing instead. (German manufacturing 56.8, services 52.1, Eurozone manufacturing 55.5, services 53.9, US manufacturing 56.6, services 55.7. But hey, repeat after me, the super weak Euro had nothing to with the dynamic expansion in Europe!). The usual relief rally on a dovish Fed, however, never materialized, with the news that Trump ordered a probe into automobile imports with the possibility of a 25% tariff (SPX +0.32%, DAX -1.47%, CAC -1.32%, Nikkei -1.28%, Shanghai -0.14%, EURUSD 1.17, EURPLN 4.30, EURHUF 318.20,). (Here comes the punishment for not agreeing to the new NAFTA and supporting Iran against the sanctions.) It seems the Turkish leadership finally understood the magnitude of the crisis, and the Turkish Central Bank intervened by raising the liquidity rate by 300 basis points (to a whopping 16.5% !), and Erdogan promising that ’Turkey would follow global principles on monetary policy’. The Lira strengthened 7% from an intraday   record low – causing a financial media euphoria – the emerging market crisis is over you know – but it will fade away soon.) Oil prices remained under selling pressure (WTI 71.50, Brent 79.40 USD), attributed to unexpectedly rising US inventories – but in my opinion, reaching the key psychological level – 80 USD in Brent – is simply a great point to take some profits, especially with news like this (’Democrats urge Trump to stand up to OPEC’).

 

  • Moody’s warned that Pakistan is vulnerable to a sharp currency depreciation and that the Pakistani Rupee could drop by 8% to 125 per Dollar within a year. (It now trades at 115.78 – in the warped language of rating agencies, this warning means that ’your currency may get into trouble any time now’.) This comes even as Moody doesn’t expect ’any significant surprises’ in macroeconomic and national security policy after the elections, with ’limited options available to political parties to change the landscape’. (Always watch out when a credit agency says nothing will happen – for one, a US-Pakistani political crisis can pop up any time. Pakistan’s reserves fell to USD 11 billion – worth 2.5 months of imports – embattled Turkey has 85 billion.)

 

Have a nice day,

Mihály

 

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